Employees Dig a Tad Deeper for 401(k) Contributions

Last year’s market volatility apparently didn’t discourage retirement savers from sticking to their plans, but it didn’t encourage more frugality either.

Fidelity Investments says today that the average employee contribution to a 401(k) plan on its platform rose a scant 1.2 percent in 2011, to $5,750. At year’s end, the average balance was $69,100, up 8 percent from the previous quarter. (That includes both market activity as well as employee contribution behavior.)

And, for better or worse, target date funds are commanding a sizable share of assets, particularly among younger employees. Nearly half of 401(k) participants age 35 and younger put all their assets into TDFs; one-quarter of all participants have 100 percent of their assets in TDFs, Fidelity says. The funds are designed with a retirement age target in mind, and typically include riskier assets the further away those targets are.

That dovetails with a report out this week by the Employee Benefit Research Institute that said that 52 percent of recent hires in their 20s had TDFs in their 401(k) in 2010. That’s a huge increase from 2006, when 29.4 percent of workers in that age group were in TDFs. There’s similar growth pattern among workers in other ages—for those in their 40s, the percentage who had TDFs in their 401(k) rose from 27.4 percent to 45.3 percent.

EBRI notes that the funds are the default investment for employers who are automatically enrolling new workers in 401(k)s. Some in the industry have defended TDF default plans, arguing that having a worker enrolled in any kind of a plan is better than having a worker in no retirement plan at all; employees are prone to putting off retirement savings decisions.

But critics of TDFs have said that the automated features in the funds can leave investors holding more equities than they should shortly before their retirement target age. And a report by the Government Accountability Office noted that participants in the plan still bear all the risk of the investment and in some cases may realize poor returns over the life of the fund. Plan sponsors have a greater responsibility for selecting and monitoring TDFs in their 401(k)s since participants are being automatically enrolled and defaulted into the funds, it added.